Back when bookkeeping was a very manual process, time-based billing made sense. However now, with a network of apps and softwares steadily reducing the amount of time it takes to do a client’s books, the old billing system is simply becoming irrelevant. In its place are a number of pricing options for accountants, one of which is Cost Plus Pricing – but what is it? And how can you implement it in your firm?
What is cost plus pricing?
A Cost Plus Pricing structure essentially follows this equation:
Cost of delivery x Margin = Client fee
One of the main issues we see crop up time and time again is that accountants and bookkeepers essentially give away some of their services for free.
To make sure that this doesn’t happen, you need to calculate the exact delivery cost of your services. This is formed of activity cost (i.e. how much are you doing and how long does it take) and tech cost. Consider the number of receipts or invoices the client submits per month and multiply that by the time it takes to approve each item.
Then factor in any meeting or planning time with the client. That leaves you with the total time you spend on the client’s books which, multiplied by your staff’s hourly rate, gives you your activity cost. A very simple example looks like this:
Now look at your tech stack. Divide your monthly tech costs by the number of clients using each particular software or app. Add those costs together and there you have that client’s tech cost. For example if a client uses Receipt Bank and Quickbooks:
Activity cost + tech cost = total service cost, so in this case, your service cost is $335.
Now you have to decide on your margin. This can be difficult, as you don’t want clients to feel overcharged or not see the value in what you’re offering, but you also want this to be a profitable exercise for your firm.
Start at 50% – you can always upsell later if you need. So $335 x 150% leaves us with approximately $500 as your client fees, leaving you $165 in profit
Why implement it in your firm?
There are a number of reasons as to why implementing a cost plus pricing strategy might suit your firm.
Firstly, the transactional approach gives you maximum control, as you are able to tailor prices to each client. You list the work exhaustively and you make sure that every cost is accounted for.
This works best if you also incorporate regular fee reviews. This allows you to consider any increases in workload and account for them. For example, your client may have grown in the last quarter, which has increased the amount of staff to prepare payroll for, and more transactions to reconcile.
Fee reviews allow you to make sure you're always in control. Also, if you have been one of the reasons behind your client's success, it's only appropriate that it be acknowledged in your fee.
Finally, the structure is easily systemised and scalable. Given that cost plus pricing is a set equation, all that needs to be done is enter the figures for each client, calculate and roll out.
You can systemise this yourself within a spreadsheet, or introduce a tool such as GoProposal to calculate the fees for you and instantly produce a proposal to send to your client.
How can you implement it?
As with implementing any new strategy, you need to first have a pricing discovery conversation with your client and establish their needs. How many items do they submit per month on average? Do they require additional services such as forecasting, offered at a fixed fee? How do all of these services tie into the goals for their business?
Once you’ve confirmed those figures, you can simply set your margin and complete the equation.
Your next steps
- Choose one client to start with
- Calculate how many items they submit to you on average per month
- Calculate how long each item takes to process
- Decide on your margin
- Fill in the Cost Plus Pricing equation
- Roll out the fees to the client
- Monitor and review on a regular basis
Reviewing your processes and monitoring your results is vital for your firm – but how can you know what you should be aiming for? We put together research from the top performing global firms on how they achieve and measure their success to give you the answers. Download our whitepaper Cloud Efficiency Report 2018 today and see how your firm measures up.